Pharmacy Merger Poses Tech Challenges

Walgreens Tuesday took a 45% stake in pharmacy-led health and beauty group Alliance Boots, a precursor to a merger and that could help the company recoup falling revenues and expand into emerging markets overseas. The leading U.S. pharmacy, which can acquire the remaining 55% of the Swiss company after three years, structured its deal to minimize the disruption to each company’s business as management for both companies figures out how to fit their infrastructure together. But an industry analyst said that regardless of the caution Walgreens shows in managing the transaction, the company is still going to face some integration challenges on the technology side.

Walgreens will have to make disparate computer and payment processing systems work together, said Brian Kilcourse, a managing partner for retail consultant RSR Research. In addition to off-the-shelf systems, most pharmacies even also use custom software to handle data from customers, pharmacy benefits managers and other constituents. The trick to a successful merger is stitching together those computer systems, most of which are heavily automated, without losing data.

Walgreens spokesperson Jim Cohn declined to make senior management available for this report because the deal hasn’t met regulatory approvals. Walgreens said it expects to complete the initial investment by Sept. 1.

Kilcourse, who was the CIO of drugstore Long’s Drugs for nine years until 2002, said Walgreens CIO Tim Theriault and his technology team will likely move data from the target pharmacy’s computer systems to the acquiring company’s computers, leaving the target company’s computers behind. Based on his personal experience of tying computer systems from Long’s acquisitions together, Kilcourse said this “‘you will be assimilated’ approach” should work for Walgreens. He said the key is in making sure the migration is gradual.

But Walgreens’ deal with Alliance Boots is the latest example of a pharmacy sector that is undergoing a lot of consolidation. Express Scripts, which as a pharmacy benefits manager helps provide drug plans for corporations, in April closed its deal for rival Medco for $29.1 billion. The deal was the largest in the space since CVS merged with Caremark in 2007. In January, pharmacy benefits manager SXC closed a deal to buy rival HealthTrans for $250 million.

The Walgreens-Alliance Boots tie could also quiet some of the criticism the pharmacy faced after allowing its deal with Express Scripts to lapse earlier this year. This move forced Express Scripts’ pharmacy benefits customers to go to other pharmacies, and the ensuring loss of prescription drug sales largely contributed to Walgreens’ earnings falling 11% for the third quarter. Walgreens reported earnings of $537 million compared to $603 million in the same quarter a year ago.

Kilcourse said that Alliance Boots, which owns more than 3,300 health and beauty retail stores in more than 25 countries, gives Walgreens an entrée into markets the pharmacy hasn’t effectively tapped, such as the U.K. and China. Walgreens is also facing strong competition in the U.S. from retailers such as Walmart and Target, which are winning a lot of customers over to their pharmacies.”Perhaps competition in the U.S. is getting too strong,” he said.

Kilcourse also believes Walgreens desired Alliance Boots for its Boots No7 line of skincare cosmetics and skin care products, which he said would like very attractive to the customers in the pharmacy. Boots No7 is currently available in the U.S. from retailers such as Target and Drugstore.com.

Comments (2 of 2)

If Walgreens wants to import products in EU they will have to comply with EU regulations such as REACH ...are they prepared for?
Do they adquire 45% of AB just for N7 lines?
AB has the opportunity to sell more in US, and Walgreens to spread its branded products in EU?

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